How to Make More Money in Car Rental

A customer-facing fleet operation can find endless combinations of industry money-making, saving, and spending approaches, but none of them work without a structure to balance plans and goals against the daily grind of results.

Rental car operators heard a run-through of profit-bearing business techniques earlier this year during the International Car Rental Show in Las Vegas.

The April 16 panel session titled, “How to Make Money in the Car Rental Business,” was led by moderator Mark Eckhaus, president and CEO of Eckhaus Fleet, and included Cindy Trennery, relationship officer at 1st Source Bank’s Auto & Light Truck Division; Tom Guy, vice president of retail operations at Mike Albert Rental; and Paige Eckhaus, president and director of operations, Hertz Rent A Car.

The session covered how to develop strategies, manage time, set goals, reduce expenses, and combine them with other practices that work to increase profit for rental car fleets.

“You need to be prepared and know what works in your fleet,” Mark Eckhaus said. “And you need to shore up your banking relationships because you will need more money.”

Banking and Business Plans

Larger operations can more easily submit a business plan with a full 12-month projection with balance sheet and P&L, Trennery said.

While that’s not realistic for smaller businesses, they can at least submit their revenue and net profit expectations with a goal for daily fleet usage or a daily dollar average.

“When you have a goal, are you comparing yourself to that goal?” she asked. “If you’re not meeting the goal, then why not? Are you able to look at it and be able to explain to your banker why? And what will you do to get it?”

She advised that rental car operations need more of a plan than just paying bills on time at the end of the month. “Figure out what’s realistic for you and then stick to your plan and build on it every year.”

Eckhaus suggested operators maintain monthly charts from recent years to track current performance and project forward.

Paige Eckhaus said her company creates a fleet plan, which includes its desired fleet mix, the number of vehicles it wants, fuel efficiency priorities, technology integration, and selling strategies.

“We also create a loose yearly goal,” she said. “This year it’s to get our buying and selling vehicles back up and running like a smooth machine. We’re about three and a half months in; are we there yet? No, but we’re in a much better position than we were last year.”

Collecting Critical Numbers

Depreciation and amortization are the two most important numbers required by a banker.

An amortization schedule is often used to calculate a series of loan payments consisting of both principal and interest in each payment, as in the case of a mortgage or a car. As a loan is an intangible item, amortization is the reduction in the carrying value of the balance.

Depreciation is the expensing of a fixed asset as it is used to reflect its anticipated deterioration.

According to Trennery:

• Amortization is what a fleet operation pays back to the bank on a loan. Average amortization is the monthly payment. For example, a loan can be amortized at 2% to 2.5% per month. If an operator buys a $10,000 car at 2.5% amortization, that yields a monthly principal payment of $250. “If you don’t understand what that car is going to cost you, you won’t make a good decision,” she said. “Amortization is what you’re paying the bank when you sell the car.”
• Depreciation is the real cost of a car on financial statements. “How you depreciate the car is what will appear on your P&L and that affects your bottom line,” Trennery said. “What you pay the bank on your amortization doesn’t appear on your P&L — that’s your depreciation. How you depreciate the car goes to your bottom line. It’s important you understand how the car is depreciating and what it’s costing you every month.

“Remember, you must pay that car off at the end. If you’re not paying it down every month, you’re not going to be able to pay off the loan.”

Performance Indicators

Guy looks at three key performance indicators: Average daily rate, fleet usage, and per unit revenue. Half the battle is identifying KPIs and seeing which ones are really driving your profits, he said.

“Review your prior year and month over month rates. You can use that as a guide to increase your usage throughout the year. It also allows you to set your rate for the year in advance. You must be nimble and be able to adjust throughout the month and week to make sure that you’re winning as much as you can.”

Paige Eckhaus added that maximizing usage is key to profitability. “Units sitting are still costing you money. Every idle vehicle represents lost revenue. If you have too many vehicles sitting, you’re still incurring expenses associated with maintenance, insurance, and depreciation. All of that just eats into your profit.”

This leads into right sizing your fleet, she said. “Do you analyze historical data and determine the optimal number and mix each year? Do you know what class your customers are booking the most? For us it’s compact and mid-size. Knowing this helps us avoid overstocking cars we don’t need and avoids underusing vehicles.”

Rates and Expenses

In deciding when to lower or raise rates, an operation needs to know when they are slow versus busy, Paige Eckhaus said. Identify major seasonal events in your service region that provide opportunities to capitalize on demand. During off-peak periods, an operation can lower rates compared to peak periods to capture more customers and increase usage, she said.

Another savings factor is developing reliable vendor relationships with one local repair shop, tire shop, and oil shop, Eckhaus said. “I try to visit at least one time a month, whether that’s when I’m dropping off a car or if I’m just passing by. Having that personal relationship has truly benefited us like none other. They offer us discounted pricing and do us favors when needed. And they always make sure to turn our vehicles around quickly so they’re not sitting idle or losing revenue.”

For calculating the average daily rate (ADR), Guy recommended looking at per unit revenue often.

“You take your two indicators, ADR and usage, and multiple the ADR by how many days in the current month. Multiplying that by your usage will give you per unit revenue. If you know how many units are in your fleet, then you know how much each one is generating in revenue and you can start forecasting.”

That figure helps inform operating costs and depreciation, which is the biggest monthly expense. “What you need to do is find the right depreciation rate that fits your business so you can be profitable on the operation side and the car sell side.”

Net Income and Operational Savings

Improving net income starts with the purchase of rental fleet vehicles, Mark Eckhaus said.

“When you buy a car, you need to think about when you’re going to sell the car,” he said. He compared rental fleet operations to used car factories because they create them. Rental car operators generally make more money selling used cars than renting them out.

“Sometimes you might not want to just buy a basic car. You may want to add a sunroof or things that other rental companies don’t have not so much to compete on the rental side, but more on the sales side. A lot of money’s made in car sales.”

Paige Eckhaus added that saving on minor or small expenses, such as buying cheaper cleaning and printing supplies in bulk, can add up substantial “pennies” to the bottom line. In another example, her operation bought driver’s license scanners from eBay at about $65 each that have eliminated all typos and increased the service speed of every transaction by a few minutes.

Guy also recommended outsourcing tasks and services to buy time and create efficiency while saving money. For example, he was sending too much time on claims management and outsourced it to a service that shares in the financial gains as payment, sparing any upfront costs. In the process, Guy learned more about claims and the importance of documents in recovering claims and winning.

“That was a huge win for us. It led us down a path of a few other things to make sure that we’re documenting properly. We started taking videos and pictures of the vehicles before they left. That was helping Mike Albert help the client. Our customers trusted the process more. There were no ifs, ands or buts about where the scratch was, so we’re able to win more claims that way.”

Managing Rental Rates

In addition to an annual rate plan, a rental fleet operation needs to position rates against competitors in the marketplace. Guy studies how rates among different competitors affect fleet usage.

“We use that as a strategy to set up our rates throughout the week. When we saw competitors were high, it fit within our business model where we are a little bit slower on those days. We were able to win on rates, and to continue to grow and drive our revenue up.”

Training employees to upsell and upgrade vehicles at the counter, along with insurance products, can help boost ROI, Mark Eckhaus added.

“There are well run rental operations that make anywhere from $5 to $25 extra per contract just because their employees are well trained and happy,” he said. “They know what they’re doing. They make more money for you.”

Finding and Running Fleet Vehicles

Sourcing fleet vehicles is another money saver, such as through fleet management companies that deal directly with OEMs and offer programs, Eckhaus said. “There are also lease companies and new and used car dealers locally that you can establish a relationship with for buying cars.” Other options include renting cars from dealerships and buying at auctions.

Guy added that a fleet usage rate in the upper 80s percentages is healthy for commercial rentals, but with consumer rentals, “if you’re not plus 90% and you’re just running sedans and small SUVs, then you got to find a way to get that up quickly.”

On the question of leasing versus buying vehicles, Guy advised that leasing could be preferable for vehicles with uncertain residual values. The operator doesn’t have risk at the end of the car sale, but then should make sure leased cars are being used and run efficiently so that it stays profitable, especially if the lease is open-ended.

Trennery added that some of her clients lease a portion of their fleets to balance out or reduce their risks. “Often, lease financing might be easier to get than financing from a bank. If you’re looking for lending sources and can’t find a bank, or the bank can’t offer all you need, going with the leasing company can help you find cars, provide financing, and other options.”

Eckhaus also emphasized that while 100% usage of fleet vehicles is the goal, it’s not worth renting out a vehicle if the cost of daily expenses exceeds the revenue of a lower rate that attracts a customer. “Sometimes it’s better to have it sit that rent it.”

Trennery further advised breaking down the amortization and depreciation on a car into a daily cost line item against daily revenue to see what that car costs each day versus various rental rates. “You have to make sure you’re making money on every single rental.”

Customer Service at the Core

Offering superior customer service is one of the easiest ways to grow, Guy said. To that end, providing employees with pay plans and bonuses motivates them to boost their customer service scores, while retaining customers and adding new ones. That can save money in advertising costs when word of mouth reputation spreads.

Mark Eckhaus added that properly trained sales agents do not need to be under high pressure. It’s more about connecting with potential customers.

“A customer needs to be educated sometimes because they don’t realize what they should do,” he said, citing the need for additional insurance if they are driving somewhere unfamiliar or new.

“I don’t think you ever want to do high pressure with a customer because you want to retain your customers. You want happy customers and employees. An employee who must resort to high pressure sales is never going to be happy.”